BY ETHAN FORMAN
---- — DANVERS — Will the stock market soar to new highs in 2014?
How fast and steep will interest rates climb as the U.S. Federal Reserve tapers its money-printing and bond-buying spree known as “quantitative easing”?
And will companies begin to hire more as consumers’ spending grows?
Two local financial experts — Rob Lutts, president and chief investment officer for Cabot Money Management in Salem, and David Caruso, founding chairman and managing director of Coastal Capital Group in Danvers — say the economic forecast is good. Both say the economy should continue to improve in 2014, with signs of modest growth, but there will be challenges.
Both were scheduled to speak today at the North Shore Chamber of Commerce about the year ahead. They chatted with The Salem News in advance of the program.
Stocks are a leading indicator, Caruso said, so last year’s historic bull market indicates the economy should follow its lead. Caruso predicts 2014 will be “a good year,” as the economy continues to expand, but without the kind of exuberance or rapid expansion that could indicate a bubble about to burst.
The stock market went on a tear in 2013, with the Standard and Poor’s 500, a broad index of stocks, up nearly 30 percent, the Dow Jones industrial average performing nearly as well and the NASDAQ, which focuses on technology companies, up nearly 40 percent.
Lutts cautions, however, that “without the Federal Reserve, we would not have had this tremendous bull market.”
The Federal Reserve has injected $3 trillion into the economy, including $1 trillion into the banking system. The Federal Reserve does this by “printing” money electronically and making it available to banks to lend. For the first time, it bought U.S. Treasury bonds to keep interest rates at record lows. The central bank also bought mortgage-backed securities, a move that kept rates low and freed up money for banks to lend.
“This has all been aimed at stimulating the economy, and it’s working,” Lutts said. “And the stock market is letting you know it’s working.”
The Fed has announced it will trim the economic stimulus program starting this month. For the long term, there may be concerns about inflation, but the good news for the economy is “the madness in Washington has stopped,” Lutts said.
Lutts was referring to the recent two-year, bipartisan budget deal, which stands in contrast to the stalemate over health care that shut down the government in October. Lutts said he recently thanked Democratic Congressman John Tierney “for coming around and being more balanced” when it comes to budget matters.
Lutts said innovation is healthy on the North Shore, and one of the things the business community may be able to take advantage of is the notion that there is a substantial amount of venture capital money out there.
“If you have a good idea, investors are lining up to invest in you,” he said.
Caruso looks at the positives and negatives in the economy when thinking about 2014, and one of those positives is jobs. The U.S. unemployment rate stands at 7 percent, the lowest it’s been since November 2008, according to the U.S. Bureau of Labor Statistics. Job growth has been slow, however.
“It’s not great,” Caruso said, “but jobs are moving in the right direction.”
Other positives are the gross domestic product, which grew at an annual rate of 4.1 percent for the third quarter — greater than expected. And leading economic indicators and consumer confidence are pointing in the right direction, he said.
“Real estate is kicking in like it never has,” inflation is “virtually nonexistent,” and corporate earnings and balance sheets are the best they have been in years, Caruso said. The problem is that companies are still skittish and are not willing to make large investments or hire in great numbers, Caruso said.
The stock market rally is, for the most part, under-appreciated, something Caruso said is also a good thing.
“If everyone was euphoric, I’m out,” he said.
Negatives in the economy for 2014 include the continued political mess in Washington, Europe and emerging markets that are “still stuck in the mud,” and “needless to say, the Fed just started their tapering (on the stimulus program).”
Long term, it appears the numbers on the charts are moving in the right direction. Stocks could do about as half as well as they did this year, which translates to 10 percent to 15 percent returns, Caruso said, and “we expect you to do nothing with bonds,” as higher interest rates will make them less attractive.
That said, Caruso said opportunities in 2014 may be investments in international and emerging markets, or small company stocks.
With people starting to spend again, consumer businesses that depend on discretionary spending — such as the local shopping malls — may do well. With that increased spending, industrial companies that make the basics — such as General Electric, DuPont and 3M — should also do well in 2014. Technology should also continue to do well, but for the average investor, social media companies like Facebook or Twitter may be too speculative to invest in.
Finally, Caruso said, financial and health care sectors should also continue to perform well in 2014 — sectors that are well-represented on the North Shore.
Staff writer Ethan Forman can be reached at 978-338-2673, by email at email@example.com or on Twitter at @DanverSalemNews.